Real Estate Matters: Couple close to retirement considers refinance
Q: We borrowed $355,900 in 2007 for a 30-year fixed mortgage at 6.25% and still owe $230,000. My wife is retired, and I plan on retiring in May 2023. Normally, we wouldn't even bother with refinancing this close to selling the house; but the rates now are so low that we’re thinking refinancing might make sense. Any thoughts on whether it would be OK to refinance, or just leave it alone this close to retirement and selling the house?
A: We’re having trouble imagining why you’ve kept this loan, when interest rates have been below that level for at least a decade. Even if you had credit issues that prevented you from benefiting from historically low interest rates 13 years ago, it’s hard to imagine you haven’t been able to raise your credit scores enough to qualify for the post-Great Recession interest rates that have been widely available since.
So, let’s do the math: You are 13 years into your loan, so you still have 17 years to go before you are debt free on your home. If you were to refinance your loan today, you’d probably cut your interest rate in half, if not more. With the information you gave us, we’re going to assume you’re paying about $2,200 every month on your loan.
If you were to choose a 10-year loan at an interest rate of 2.125%, your monthly payment would be $2,120 with around $1,500 in points and fees. If you chose a 15-year loan at 2.125%, your monthly payment would drop to just under $1,500 and you’d pay around $2,200 in upfront fees. You may find even lower rates than these, so you’ll have to shop around and see what you’re offered. All of these mortgages require a credit score of 740 or higher.
While your payment is about the same, you’ll be paying down your mortgage far faster than if you stay the course. Imagine taking a wad of $100 bills and lighting them on fire. Wouldn’t you rather have those in your bank account?
Refinancing now as a win-win for you. You pay off the loan a bit earlier than with your old loan, your monthly payment goes down slightly with the new loan and you’ll save a ton of money over the life of the loan; compared to keeping your old loan for the next 17 years.
We understand that you think this might be a lot of work when you’re going to sell the property in three years. Sure, there’s some work involved, but in three years you might have as much as $50,000 more in equity than if you don’t do anything. And anything can happen; you might find yourself living there for five or 10 more years and walk away with a home that’s essentially paid off.
Talk to four or five different lenders: online, a local bank, a local mortgage broker and a credit union, to start. No need to give them any personal information — just talk about what you’re looking for. Pull a copy of your credit history and score by going to each of the three credit reporting agencies (Equifax, Transunion and Experian), so you can answer the lenders’ questions and make sure you qualify for the best rates and terms available. Ask what each lender’s charges will be so you can compare costs on an apples-to-apples basis.
Finally, when you compare loans, make sure you understand what the lender is including as far as closing costs. Some lenders include real estate taxes and insurance escrows when computing your closing costs, but don’t focus on those unless every lender you talk with is including them. You may have escrows with any lender you choose, but you can think of those escrows as your money that you are giving to the lender to hold for you and for the lender to later use to pay real estate taxes and homeowners’ insurance bills down the road. Focus on what out-of-pocket expenses you’ll pay and what it will cost you to close the loan with the closing attorney, settlement agent or title company.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)
©2020 Ilyce R. Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency, LLC.